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Saturday, December 20, 2008

The Fed, Confidence, Trust and More.....

The FED cut rates to basically zero this week in a bold move with bold language that basically says we are going to do EVERYTHING we can to get money flowing through the system again. EVERYTHING. The big worry remains deflation as it should be. I have written on this topic at length before but the short of it is deflation is bad because if people think prices are going down, they do not buy today. It also increases ones debt burden because the nominal value does not go down while the value of the underlying assets do.

By cutting rates so dramatically in the short end, and forcing rates down on the long end through bond purchases, they are hoping to stimulate the economy by making it cheaper for people to buy stuff – especially homes. They are also forcing people, like me, who have a lot in treasuries at the moment to get worried. Though I enjoyed being there while the poop was hitting the fan in everything else, now I am left with an asset earning, well, nothing. Treasury money market funds are not going to be yielding enough to cover fees. They are trying to FORCE us to invest in higher yielding assets.

Are they right to do this? I am going to bring you back to the very first piece I wrote this year on January 18th. On that day I wrote a story called “The Confidence Man” - here is a piece of the last paragraph.

“Now is the time for innovative thinking that aligns short-term fixes with long-term ethical direction. The promise that quick-fix maneuvers aimed at stimulating more spending will rescue the economy is yet another example of the current administration's wishful and delusional thinking. "

These policies will only work IF IF IF people have the CONFIDENCE to start spending and investing again. One should only have confidence if there is TRUST. But come on, with stories like MADOFF breaking every week, how can we? The powers that be tell us to spend and invest but every time we do we are side-swiped with some disaster that they clearly had no idea was coming. This recovery will take a while as trust is not something that should come back overnight.

So yes they are right to boldly cut rates to encourage borrowing and lending BUT they must also fully acknowledge just how much the system has FAILED and is BROKEN. They must boldly say they will hold these slime dogs accountable to the full extent of the law and work to create the right regulatory framework to stop this from happening again. They need to work to build trust.

For now YOU, as an investor, have to get involved. YOU have to know who is managing your money and demand transparency and disclosure. YOU must ask questions and say NO to investments that you do not understand. I have made my fair share of investment mistakes but this much I now know – try to invest with people you know, you trust, where you have transparency and can where you can do your own due diligence. If possible stick to simple products with established providers. It is back to basics times in more ways than one.

The end result of this will be SERIOUS change in the wealth management business. SERIOUS. I have so many ideas on how this should happen I feel like my head is going to pop off.If you are a regular reader you know I am all about REVOLUTIONS at the moment and an INVESTOR REVOLUTION is one of the many I am a part of.